Network Effect

Tipping points and network effects

We have seen that environmental systems can reach irreversible tipping points, which profoundly alter the functioning of those systems. There is now a growing recognition that economic, social and technological systems can undergo similarly profound and widespread transformations, triggered by small events or interventions and amplified by positively reinforcing feedback mechanisms. If understood and utilised well, these positive tipping points may hold the potential to accelerate the net zero transition (Lenton et al., 2022).

When assessing risks and opportunities in the transition, we also need to consider potential network effects, which can either help or hinder the drive towards decarbonisation. In their simplest definition, direct network effects mean that “Increased usage of a product leads to a direct increase in the value of that product to its users” (Currier, 2018). This increase in value is often exponential. For example, the more people who are connected to a technical communication platform, the more value that platform holds for those users.

Indirect network effects typically involve an increase in value based on the presence of complementary actors, products or services. For example, the more sellers there are in a marketplace, the more buyers this marketplace is likely to attract, even though the sellers are competing with each other. The more investors who are financing net zero businesses and technologies, the greater the expectation and belief that these are sound investments.

In economic terms, this phenomenon is called strategic complementarities, which means that the net benefit to taking an action becomes a function of how many others are doing the same thing (Anadon et al., 2016; Bulow, Geanakoplos & Klemperer, 1985). Expectations are a key element of this acceleration of change.